On July 23, 2025, the State Council Information Office held a press conference announcing that the Hainan Free Trade Port (hereinafter referred to as the "Hainan FTP") will officially launch the island-wide independent customs operations on December 18, 2025. A series of new policies and supporting documents have been formulated and will be implemented to support the Hainan FTP after the launch of independent customs operations. One of these policies is the Duty-Exemption Policy for Hainan FTP Processed and Value Added Products (hereinafter referred to as the "Policy"). According to the Policy, goods made of imported materials and parts, whose value added through processing in the Hainan FTP reaches or exceeds 30%, will be exempt from import duties when entering other customs area of China (hereinafter referred to as "China's Mainland" or "Chinese Mainland", according to The Law of the People's Republic of China on the Hainan Free Trade Port). For businesses looking to enter the Chinese Mainland market, especially by opening manufacturing facilities in China to produce goods using raw materials and parts imported from regions and countries outside China's customs territory, this Policy offers significant benefits by reducing enterprise costs.

The main regulation governing the duty-free tax for value-added by processing after the launch of independent customs operations will be Announcement 158, issued by the General Administration of Customs on July 23, 2025 – the "Interim Measures of the Customs on Administration of Tax Collection for Duty Exemption Policy for Hainan Free Trade Port Processed and Value Added Products" (hereafter referred to as the "Interim Measures"). The Interim Measures define key aspects of the policy's applicability, the formula for calculating the value added, the qualifications of eligible enterprises, the application process, exceptions to the policy, and other relevant aspects, thereby establishing the regulatory framework for the policy's implementation.

The duty exemption calculation formula for the Hainan FTP processed and value-added products provided by the Interim Measures is as follows:

(Domestic sales price − ∑imported materials price − ∑domestically purchased materials price) / (∑imported materials price + ∑ domestically purchased materials price) × 100% ≥30%

In this formula, the value of products sourced from Hainan FTP can be deducted from the domestic purchased materials price. Based on the formula and the provisions of the Interim Measures, the core of the policy application revolves around two main elements, i.e.: 1) the "processing" and 2) "value added," which, if both complying with the set requirements, result in 3) the "duty exemption" effect for domestic sales (understood as sales to the China' s Mainland).

(1) Processing

Processing involves transforming imported materials into new products that are different from the original materials, which is the key element for the Policy applicability. While the Interim Measures do not define the term "processing" specifically, it can be inferred that:

(2) Value Added

The value-added by processing within the Hainan FTP must reach or exceed 30% of the combined value of imported and domestically purchased materials.

(3) Effect of Policy Application: Exemption from Tariffs on Finished Goods Entering the China’s Mainland Market

It shall be noted that, the Policy exempts tariffs on the sale of goods. However, import VAT and consumption tax will still be levied as required by applicable laws. The actual cost savings come from the tariffs on materials imported from the first-line customs area i.e. the frontier between Hainan and other countries and regions outside the Chinese customs territory. Therefore, businesses should prioritize processing products with high tariff costs within the Hainan FTP for maximum cost savings.

Moreover some of the goods might not be eligible for the tariff exemption even if reaching the required 30% processing level. 

That would be the case when either the materials and parts or the finished goods, are under the so-called "Four Categories of Measures". These four categories refer to: tariff quota management, trade remedy measures, suspension of tariff concession obligations and additional tariff measures, or additional tariffs measures for the purpose of levying retaliatory tariffs (except for goods subject to exclusion measures for imposition of additional tariffs).

As a result, if imported materials and parts are subject to the "Four Categories of Measures" the final product (even if not falling within its scope) will be excluded from the Policy. On the other side, if the final good falls within the "Four Categories of Measures", although none of its imported materials or parts does, it will still not be eligible for the tariff exemption when entering the China's Mainland. 

The final good undergoing so called "minor processing" will also be excluded from the tariff exemption under the Interim Measures.

As noted earlier, the Duty Exemption Policy for Hainan FTP Processed and Value Added Products enables imported materials to enter the China's Mainland market tariff-free. This Policy is especially advantageous for foreign enterprises targeting the Chinese Mainland market, where products require imported materials and where material tariff costs are high. Before the formal implementation of the Policy, it is advised that enterprises take preparatory actions to ensure the eligibility for the tariff exemptions. Based on the initial production plan, some of the production and processing stages might need adjustment based on the Policy's key points. For example, enterprises may consider sourcing alternative raw materials within Hainan FTP to include materials sourced from Hainan in the value-added calculation. Alternatively, key processing stages could be placed on the island to ensure processing exceeds "minor processing." Prior communication with relevant regulatory departments before production begins might be necessary to ensure correct Policy application. Additionally, other production-related tasks such as establishing the enterprise, evaluating raw material suppliers, selecting factory locations, contract negotiations, and other necessary preparations need to be taken.